Congress Should Not Infect Medicare Drug Plan With Price Controls

In the 110th Congress’ first 100 hours, incoming House speaker Nancy Pelosi and her Democratic colleagues plan to empower Medicare to negotiate prices directly with pharmaceutical companies. Uncle Sam’s muscle, they argue, will dragoon lower charges from drug makers. Democrats tout the Department of Veterans Affairs medicine-buying program as their model.

Model?

The VA’s National Formulary (VANF) is more Model-T than Maserati. Congress should park this vehicle in a junkyard.

The VANF does not involve VA officials and pharmaceutical executives cutting deals around a conference table. This is a federal price-control program. The VA buys drugs from pharmaceutical companies at a minimum 24 percent discount below the Average Manufacturer’s Price, or the “best price” offered to private-sector purchasers, whichever is lower. Not surprisingly, paying drug suppliers nearly one-quarter below wholesale (or less) generates myriad economic distortions for which patients pay the price.

The vaunted VANF covers some 1,300 drugs, just 30% of the 4,300 drugs available on Medicare’s market-priced formulary.

“The VA system does not provide a formulary that is comparable in scope to those currently provided by Medicare Part D plans,” Kathleen Hughes, Wendy Watson, and Thomas Goss concluded in their December study for Covance Market Access Services. Covance’s paper, prepared for the Pharmaceutical Research and Manufacturers of America, analyzed the 226 drugs most commonly prescribed for Americans over 65. Of these, Medicare covers 213. VANF includes 165, or just 73%, of these agents.

Medicare also pays for all 13 anti-cholesterol drugs Covance explored; VANF covers just seven (54%). Crestor and Lipitor are among the popular drugs unavailable through the VA

Covance found 26 drugs Medicare covers that VANF excludes. These drugs accounted for 264 million prescriptions in 2004. Beyond the reach of VA patients, these drugs include Nexium for acid reflux and Alimta, Avastin, and Herceptin for cancer.

VANF also resembles the medicine chest in a long-abandoned house. Its contents may be cheap, but they’re hardly modern. Columbia University’s Frank Lichtenberg last year discovered that VA’s formulary includes only 38% of the drugs the FDA approved in the 1990s and just 19% of those it authorized since 2000.

“New drugs as a matter of VA policy are not considered for the VA formulary for three years, regardless of improved effectiveness or reduced side effects,” writes Manhattan Institute senior fellow Benjamin Zycher. Three years awaiting a new drug may be merely excruciating for Americans with arthritic knees. But for those fighting, say, pancreatic cancer or other aggressive, life-threatening diseases, such foot dragging could prove fatal.

VANF covers some 7 million veterans. Medicare now serves six times as many—roughly 42 million beneficiaries. Retiring Baby Boomers will swell Medicare’s population to a predicted 78 million by 2030. Thus, flexing Medicare’s monopsony power would restrain drug-company revenues and, hence, reduce the cash they need to develop new drugs — for Americans of all ages.

Zycher forecasts that reshaping Medicare in VANF’s image would chop prices by at least 35% by 2025. Meanwhile, “The cumulative decline in drug R & D for 2007 – 2025 would be about $196 billion in year 2005 dollars, or $10.3 billion per year. Because R&D costs for new medicines are about $1 billion, the loss would be about 196 new drugs.”

How much longer would Americans wait for the next Lipitor, Wellbutrin, Viagra, or something still unimaginable? And what if dwindling research funds prevent new treatments from traveling from lab to pharmacy?

Even worse, Zycher calculates, “an annual R&D decline of $10 billion would result in an expected loss of 5 million life-years each year,” or 90 million life-years extinguished through 2025.

Rather than speed the deaths of so many Americans, Congress should approve Rep. Dana Rohrabacher’s (R.-Calif.) idea. By commencing a new treatment’s 17-year patent exclusivity when sales begin, not when tests start, a drug company could recover its investment through lower prices across a longer period, rather than higher charges during a shorter interval.

There are at least 100 smart ways to help older and younger Americans buy costly drugs. Making Medicare mirror the VA’s drug-pricing jalopy is not among them.